The Fed Won’t Pop AI: It Will Save Housing | Blue Door’s Dan Krausz On The Three Neutral Rates, The Liquidity Waterfall, and Why Profits Rising While Employment Falters Is Not Bearish For The Stock Market
Timestamps are as accurate as they can be but may be slightly off. We encourage you to listen to the full context.
Podcast Summary
This episode features Dan Krausz of Blue Door Asset Management discussing how the global economy is currently shaped by two dominant macro forces: aggressive fiscal policy and Artificial Intelligence. Krausz presents his contrarian thesis that a 6% fiscal deficit creates a "three-speed economy" where different sectors experience vastly different neutral rates, with AI thriving while housing and small businesses face a silent recession. (21:00) He argues that rather than being a bubble threat, the AI boom may be essential for the Fed to manage long-term inflation and debt sustainability. The conversation explores how this environment requires investors to follow three critical positioning rules: follow policy, invest in AI enablers (shifting from infrastructure to implementation), and avoid the middle.
Speakers
Jack Farley
Host of Monetary Matters podcast, providing macro-focused investment insights and interviews with leading financial minds. Active on social media sharing economic analysis and market commentary.
Dan Krausz
Portfolio manager and macro strategist at Blue Door Asset Management, bringing over seven years of experience analyzing the intersection of fiscal policy, monetary policy, and markets. Known for his framework-driven approach that combines macro analysis with bottom-up company fundamentals to identify investment opportunities.
Key Takeaways
The Three-Speed Economy Requires Different Neutral Rates
Krausz argues that the massive 6% fiscal deficit has created three distinct economies operating at different neutral interest rates. (16:57) The AI sector can handle rates well above current levels, small businesses need rates around 3%, and housing requires rates 150 basis points lower than current levels. This means the Fed's traditional "neutral rate" concept breaks down when fiscal policy creates such dramatic distortions. For investors, this explains why traditional cyclical sectors have underperformed despite strong nominal GDP growth - they're getting the negatives of higher rates without the positives of fiscal stimulus.
AI Implementation Is the Next Critical Phase
While the market has focused on AI infrastructure (semiconductors, data centers), Krausz emphasizes that the next crucial phase is AI implementation. (23:23) Without successful implementation creating actual productivity gains, all the infrastructure investment becomes oversupplied. This shift represents both an opportunity for implementation-focused companies and a risk for pure infrastructure plays. Companies that can demonstrate real AI-driven productivity improvements will capture the value, while those that can't may see competitive pressures erode any gains.
Follow Policy, Not Traditional Economic Signals
In an environment dominated by 6% fiscal deficits, following government policy direction has become more important than traditional economic indicators. (24:01) Krausz points out that during the recent nominal GDP boom, traditional high-beta sectors like chemicals and transports performed poorly because they only got the negatives of higher rates. Meanwhile, areas benefiting from fiscal policy like IRA manufacturing did well. Investors need to identify government-designated strategic industries and areas like housing supply that will receive policy support.
The Fed Needs AI for Long-Term Inflation Control
Contrary to bubble concerns, Krausz argues the Fed actually needs the AI productivity boom to succeed. (04:21) With 6% deficits creating natural inflationary pressures outside the Fed's control, their best shot at stable long-term inflation is an AI-driven productivity boom. This creates a paradox where trying to stop an AI "bubble" could actually undermine long-term inflation goals. The S&P 500 PE ratio has historically been a good predictor of five-year productivity growth, suggesting markets are pricing in this productivity potential.
Avoid the Middle - Competitive Disruption Risk
Companies that aren't AI implementers, fiscal beneficiaries, or undisruptible from AI face significant risk in this environment. (24:51) In competitive industries, the first mover with AI implementation has incentive to price down to current margins and take market share from everyone else. Leveraged companies without capital to invest in AI are particularly vulnerable to falling behind. This "avoid the middle" rule helps investors steer clear of areas where it's difficult to identify winners and where competitive dynamics will compress returns.
Statistics & Facts
- AI capital expenditures are expected to exceed $400 billion this year, contributing meaningfully to GDP growth with perhaps a majority of growth coming from AI CapEx. (00:57) This massive investment scale demonstrates how AI has evolved from a micro to a macro factor.
- Small business CapEx plans have never recovered from 2022 when rates went up, according to NFIB data. (57:47) This illustrates how parts of the economy remain in recession despite strong overall GDP growth.
- The average outstanding mortgage rate is 4.1% while current mortgage rates are 6.3% - a 220 basis point difference. (55:15) Krausz notes that normal housing inventory turnover typically requires being within 50-100 basis points of the average outstanding rate.
